TCF Finesses Overdraft-Fee Controversy

TCF Financial Corp. was among the first to free customers of account maintenance fees, back in the 1980s, but now it is leading the charge to bring them back.

The $17.7 billion-asset company in Wayzata, Minn., announced this week that it is planning to introduce TCF Convenience Checking in the first quarter, a product that would replace overdraft fees on each item with a daily non-sufficient-fund charge and another charge should an account fall below a certain level.

For a company that gets more than one-quarter of its revenue from fees and service charges, the product is an attempt to be proactive as Washington contemplates overhauling the way banks charge customers when their accounts are overdrawn.

"This will totally restructure how our fee income works," William A. Cooper, the company's chairman and chief executive, said in an interview Wednesday.

"A lot of things are still being determined, but one thing that is clear is that the monthly account maintenance fee is back."

His bill would require banks to let their customers opt in for the service allowing overdrafts and place substantial restrictions on the cost and frequency of charges.

The bill also would add a slew of disclosure requirements, such as reporting a year-to-date tally of fees on monthly statements and notifying customers about alternatives to overdraft protection, such as lines of credit, so that they can compare the terms. The Federal Reserve is also examining regulatory changes.

Cooper acknowledged a pileup of fees can cause a "train wreck" that needs fixing, but said he hopes any solution comes from the Fed rather than Congress.

In the midst of a banking crisis, "what do we get out of Congress? Legislation on bank fees. It's really helpful," Cooper said sarcastically.

"The good news is that the Federal Reserve actually knows something about the banking system, opposed to Chris Dodd."

Cooper said TCF will make any necessary tweaks to the new checking product to comply with any new legislation or regulations.

The uncertainty about these changes is in part why TCF is keeping the product's details under wraps.

However, as described in a press release and during the company's third-quarter conference call Wednesday, the product would replace any revenue lost on overdraft fees, which are currently $35 per item, with a daily charge on negative balances.

In the call, the company said that the fee would probably range from $10 to $25 per day.

TCF also said it is looking for ways, perhaps text messaging or e-mail, to notify customers when their accounts are overdrawn. Also, accounts that fall below a minimum balance would be assessed a maintenance fee.

"When we simulated it out, it is fairly revenue-neutral and possibly revenue-positive over time," Cooper said. "The one unknown is that we don't know how behaviors will change."

Lana Chan, a senior bank analyst at Bank of Montreal's BMO Capital Markets, said she thinks it is all still too uncertain to make such projections.

"TCF is trying to be proactive, and I think it is a step in the right direction, but I think it is all still too unclear to determine what the ultimate impact on their deposit service fees will be," Chan said. "This is a major part of their revenue, and I just don't see a lot of visibility."

With its new product, TCF follows Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., all of which last month announced reductions in overdraft fees.

Analysts said it was not surprising that TCF was probably the first company of its size to react to the expected changes in how banks can charge for negative balances. This is because, with 1.7 million checking accounts, TCF has a disproportionate number of retail customers for its size.

"That's the size that a $100 billion-asset company would typically have," Cooper said.

Terry McEvoy, an analyst at Oppenheimer & Co., downgraded the company's stock from "outperform" to "perform" in September after the larger companies' announcements of fee-structure changes.

"Because of their operating model, they generate a large amount of those types of fees, and investors have been waiting for them to address it," McEvoy said Tuesday.

For the third quarter, the company reported that $77.4 million of its $289.5 million in revenue came from such banking fees and service charges. It reported earnings of $17.4 million, down 42% from a year earlier. Driving the decline was a 45% increase to its loan-loss provision, which totaled $75.5 million at Sept. 30.

Cooper said that in addition to being proactive on changes TCF is probably going to have to make, the new product should also reduce criticism banks like TCF get as a result of making so much money on what is usually consumers' misjudgment of their balances.

Still, it is those fees that have let the company keep branches with extended hours, open seven days a week and on holidays, both Cooper and analysts said.

These services have been a part of TCF's retail banking approach since it introduced totally free checking in September 1986, Cooper said, adding that it was the first company to do so.